Speech: English - Auckland Chamber of Commerce

Speech to the Auckland Chamber of
Commerce and Massey UniversityHeritage
Hotel, AucklandEmbargoed until
1pmWednesday February 27 2013

Good
afternoon. It’s a pleasure to be with you again
today.

My thanks to Michael and the Auckland Chamber of
Commerce, and Steve and Massey University, for inviting me
back to this annual event.

This is the fourth time I’ve
spoken at this forum since becoming Minister of
Finance.

When I first spoke to you, the world was very
much in a state of crisis. We are still seeing the
aftershocks of that play out in Europe and the United
States.

New Zealand was struggling out of a recession that
started in early 2008 - well before the rest of the world.

We faced many years of large fiscal deficits and rising
debt.

And, although we didn’t know it at the time,
Christchurch was soon to be hit by a series of devastating
earthquakes.

While the global economic situation still
remains uncertain at best, here in New Zealand we are making
good progress.

The economy is growing and we’re on track
to surplus.

Business confidence is improving and our
companies are becoming more competitive.

Wages are growing
and inflation is low. Net household disposable income is
around 20 per cent higher than it was four years
ago.

Compared to mid-2009, over 60,000 more Kiwis have
jobs – although the unemployment rate remains too
high.

Interest rates are at 50-year lows and households
are saving more.

And the $30 billion Christchurch rebuild
is well underway, with considerable help from New Zealand
taxpayers.

Over the past four years, the Government has
embarked on a wide-ranging programme of sensible economic
and fiscal management.

We’ve identified the ingredients
needed to attract the productive investment required to
support jobs and higher incomes, and help families get
ahead.

And we have chosen a moderate but persistent rate
of change. That has allowed us to take people along with
us.

For instance, this year the Government will move to
make significant change to the Resource Management Act,
introduce new housing policies and implement a new framework
for the use of water.

And, as you know, we’re awaiting a
Supreme Court decision that we hope will allow us to press
ahead with selling up to 49 per cent of our electricity
companies.

I’ll come back to the outlook and the
Government’s priorities for this year in a few
minutes.

But first, I want to diverge and tell you a story
about the New Zealand rock lobster industry.

Investing in high technology
exporting

The lobster industry has invested
heavily over the past two decades to improve the value of
the crayfish harvested off the Fiordland coast.

Back in
the 1980s, lobsters – or crayfish as we know them - were
generally tailed, frozen and exported mainly to the United
States. The bodies were discarded as waste.

The Fiordland
Lobster Company is part of the industry-wide transformation
that has happened since then.

The company is run out of a
small office in Te Anau and has become a market leader in
live crayfish exports to high-end customers in Asia, the
Middle East and Europe.

It was set up in 1987 as a
partnership between 15 Fiordland fishermen and seafood
processor Mount Maunganui Seafoods.

The company now
exports more than 800 tonnes of lobster a year and its
annual revenue tops US$50 million.

Including casual
workers, it employs up to 60 staff at the peak of each
season.

This is not just a story about clever exporting.

It’s a story firstly about the company’s
determination to manage the recovery of crayfish fisheries
and then maintaining them at sustainable levels.

It’s
also a story about careful and meticulous development of
intellectual property and use of technology over more than
two decades.

In the case of Fiordland Lobster, a key to
its success is keeping the crayfish alive and in premium
condition until they reach their overseas customers.

That
is no small challenge. Over a number of years, it has
invested heavily in research and development to produce
holding tanks that are controlled to provide ideal water
conditions, where the crayfish spend 24 to 48 hours before
being packed for export.

They land at their destinations
alive and command a premium price.

It shows that at a
time of a relatively high exchange rate, there is no
distinction between so-called commodity and high-tech
exports.

All New Zealand exporters have to be smart to
succeed – whatever their product or service.

We have
hundreds more Kiwi businesses investing and growing like the
Fiordland Lobster Company.

Becoming a magnet for
investment

We need more of them. As the Prime
Minister said last month, New Zealand needs to be a magnet
for investment.

That’s how we’ll create new jobs and
higher incomes.

That’s investment by individuals and
small businesses, as well as big businesses. And it’s
investment by people from overseas as well as Kiwis.

Real
growth doesn’t happen until one more business invests
another dollar, sells a better product or service, and hires
another person.

New Zealand lost competitiveness in the
mid-2000s, when growth was built on more debt, unsustainable
consumption and housing speculation, and large increases in
government spending.

So over the past four years, the
National-led Government has taken action on a number of
fronts to help attract investment and support business
growth.

There is no single silver bullet that can achieve
this.

Instead, we must literally do hundreds of things
well, year after year.

We’ve reduced tax on work,
savings and company profits, while increasing taxes on
property investment and consumption.

We’ve introduced
voluntary 90-day trials and a new starting out wage as part
of a labour law package that makes it easier for businesses
to employ new staff.

We will invest significantly in
welfare reforms to support more beneficiaries into
work.

We will invest billions of dollars more in modern
infrastructure such as roads, rail, ultra-fast broadband.

We will finish the metro-rail replacement and the
Waterview project in Auckland, and get underway with
Transmission Gully near Wellington.

We will continue our
relentless effort to cut red tape and improve regulations
that were getting in the way of businesses and households
– such as reducing warrant of fitness requirements and
reducing the cost of passports.

We’ve demanded better
public services and a $1 billion dividend over three years
from government agencies. For example, last year ACC reduced
levies on households and businesses by more than $600
million.

We will ensure young New Zealanders receive
relevant, future-focused skills through National Standards,
and improved transition for teenagers from school to work
and training.

We will invest in in 14,000 more
apprenticeships over the next five years.

For the first
10,000 apprentices who enrol, the Government will pay $1,000
towards their tools and off-job costs, or $2,000 if they are
in priority construction trades.

We will continue to
invest record sums in science and innovation, and we will
tackle some of the biggest challenges facing New Zealand
through the new National Science Challenges.

We will
pursue high-quality trade agreements to improve global
market access for New Zealand’s goods and services.

We
are currently negotiating free trade agreements with the 10
other countries in the Trans-Pacific Partnership, including
the United States, and separately with a number of other
countries including India, Russia and Korea.

And the
Government will commit around $13 billion to support the
rebuilding of Christchurch.

So this Government is strongly
committed to creating an environment that encourages
investment and business growth.

And we will continue
working to move the economy away from excessive borrowing,
consumption and housing speculation.

The Business
Growth AgendaWe have pulled all of this
together in the Business Growth Agenda work
programme.

Working closely with businesses, ministers have
issued progress reports detailing a large number of
initiatives across six areas:

• export
markets• innovation• skills and
safe workplaces• infrastructure •
natural resources • and capital marketsI
would like to acknowledge the contribution business, local
government and unions have made to policies set out in these
documents.

I also invite further ideas we can pick up to
support investment, jobs and better incomes.

This morning
here in Auckland, I was joined by colleagues Steven Joyce
and Craig Foss to issue the sixth and final Business Growth
Agenda progress report, covering capital markets.

It sets
out 50 measures that will help support well-functioning
capital markets, which go hand-in-hand with attracting
productive investment.

One of the most important
contributions the Government is making to improve capital
markets is the sale of minority shareholdings in its energy
companies and Air New Zealand.

Subject to a decision from
the Supreme Court on issues around water rights, Mighty
River Power will be the first share offer in the programme
in the first half of this year.

This will be a
significant shot in the arm for New Zealand’s capital
markets.

As we’ve promised, New Zealanders will be at
the front of the queue for shares.

Including the
Government’s majority stakes, ministers expect 85-90 per
cent of the shares across the programme to be held by New
Zealanders, after the IPOs.

We will make it as easy as
possible for New Zealanders to get access to information,
register their interest and buy shares.Providing financial system
stabilityI now want to talk about another
important area where the Government is working to help give
businesses the confidence to invest and grow.

This is the
area of financial system stability. It is about protecting
the economy from periods of excessive growth in credit and
asset prices and also about protecting the system from
institutional failures.

In recent years, we have seen the
damage these periods of credit growth have caused through
excessive household borrowing that created house price
bubbles.

This is not unique to New Zealand.

Excessive
credit growth, and a subsequent bust, was at the heart of
the most recent Global Financial Crisis.

In many ways, New
Zealand was fortunate. While we experienced a large credit
cycle, our core banking sector did not suffer from the kind
of bust seen in other countries.

But we cannot be
complacent. We need to learn from the experiences of other
countries and ensure we are doing all we can to preserve the
stability of our financial system.

Over the next several
weeks, the Reserve Bank will consult on its proposals to use
more tools to help ensure financial stability.

They will
not be the answer to all problems created by excessive
credit cycles. But they will certainly help at the
margins.

Under these proposals, the Reserve Bank will have
a greater ability to influence the amount of lending done by
banks and other financial institutions.

This might include
requiring lenders to:• Hold additional capital
on their balance sheet as a buffer during an economy-wide
credit boom.• Hold additional capital against
loans in specific sectors if risks emerge in those
sectors.• Adjust their funding ratios to use
more stable sources of funding to avoid the impact of
short-term funding shortages.• Restrict high
loan-to-value ratio lending in the housing sector.

I don't
want to prejudge the consultation process today. But I will
explain why the Government is considering formalising the
use of these tools.

Since the Global Financial Crisis,
the Reserve Bank has laid out new requirements to encourage
banks to strengthen their balance sheets, in terms of both
capital and liquidity buffers.

Consistent with the new
international rules to hold more capital, the Reserve Bank
is already implementing some of these measures.

After
several years of discussion against the background of an
international debate on the same issues, the Government will
formalise the policy and ensure the decision making process
is transparent.

As I’ve said, it is intended to help
manage excesses in credit cycles, as occurred in the lead up
to the Global Financial Crisis.

In particular, we want to
avoid a strong upswing in asset values and any unsustainable
growth in borrowing well in excess of economic growth.

The
Government’s interest in slowing this sort of cycle is
underlined by the experiences that other countries continue
to face as a result of the GFC.

The effect of the cycle
unwinding can be devastating. We see economies around the
world that have not yet recovered to the same level of
economic activity as before the GFC.

Millions of people
have suffered from real income reductions and significantly
reduced public services.

Some economies face many more
years of difficult adjustment to reduce debt and reignite
income and job growth.

The social and economic costs of
credit excesses are very high and we should take practical
measures to avoid them.

Another area the Government is
interested in, with regard to improving financial stability,
is minimising the potential cost of bank failures.

Other economies have been crushed by the burden of
bailing out financially stressed banks during the GFC.

New Zealand has a particular concentration of financial
activity in a handful of large banks.

The actions of
governments through the GFC may have created an assumption
that banks under threat will always be bailed out.

This
attitude in itself could make banks less worried about
taking risks if they expect the taxpayer to step in when
needed.

Bank owners can collect the profits and pass on
the losses to taxpayers.

This is an unfair burden on
taxpayers and a distortion of sound incentives in our
financial system.

The ‘Too Big To Fail’ problem also
represents a large contingent liability for taxpayers.

In
my view, we should do as much as we can to reduce these
risks to taxpayers, and hand more of the costs and
incentives back to the financial system.

Banks and other
lenders will then take more care if they face all the
consequences of their decisions.

Effectively dealing with
this issue will firstly mean more safety buffers for banks
and therefore less risk. This is where financial stability
instruments can play an important role.Secondly, it
means having effective structures in place for dealing with
any bank failures. The Reserve Bank’s Open Bank
Resolution - or OBR – mechanism is designed to quickly
spread the losses of a failing bank across shareholders and
creditors. This allows it to stay in business without a
government bailout.

This is an important mechanism, and
will reduce the likelihood of taxpayers having to bail out a
failing bank.

There will be plenty of discussion about
how the new financial stability tools will affect monetary
policy.

They are not a replacement for interest rates as
the principal tool of monetary policy, although the two
policy frameworks will interact.

In the same way the
Reserve Bank takes into account Government tax and spending
policy in setting interest rates, the Bank will also take
into account any effect of using these tools.

The
credibility of these tools will hinge on their use by an
independent Reserve Bank.

As you know, benchmark interest
rates are set independently by the Reserve Bank.

Decisions
about loan-to-value ratios and bank funding and capital
requirements should also be made by an independent Reserve
Bank.

The temptation for some politicians to fiddle with
the economy for short-term gain at the expense of long-term
pain would be too great.

In terms of the next steps, the
Reserve Bank will publish a consultation paper next month
and invite submissions and comments on the proposed
financial stability framework.

I invite all interested
groups to provide feedback.

The Reserve Bank and Treasury
will finalise arrangements and I expect to sign of a
memorandum of understanding with Reserve Bank Governor
Graeme Wheeler by the middle of this year.

There are some
expectations that these tools will be used immediately to
dampen the Auckland housing market. Those decisions will be
in the hands of the Reserve Bank.

The greatest influence
on the housing market will remain interest rates and supply
constraints created by the planning system.

Later this
year, the Government will have more to say about how the
financial stability tools will work alongside policies on
more flexible supply in the housing market and social
housing reform.

ConclusionSo you can
see that the Government is busy, focused and taking action
across the many areas needed to boost growth, investment and
jobs.

We’ve set out a clear programme and we are
delivering on it.

Budget 2013 will be about taking the
next steps in that programme – and particularly in areas
that help build the business growth and investment needed to
support more jobs and higher incomes.

We are making good
progress. Many other countries, struggling with too much
debt and little growth, would value being in New Zealand’s
position right now.

Now is not the time to put that
progress at risk by changing direction in some misguided
search for simplistic quick fixes to our challenges. They
don’t exist.

Now is the time for sensible economic
management and strong, stable leadership.

John Key’s
National-led Government is providing that.

Providing we
stick to our plan, I’m confident that we will build the
brighter future New Zealanders deserve.Thank you.

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